How I Manage Money: Becoming Financially Aware

(This is Part 1 of a multi-post series about how I manage my money. If you landed here without context, catch up on what you missed in the introductory post on the Levels of Financial Wealth.)

Phase 1 on the roadmap is to build a budget of your income and expenses. The word “budget” sounds boring, rigid, and constraining to a lot of people, myself included. Don’t let that stop you. In actuality, this is one of those times where the process of budgeting is far more valuable than the budget itself.

Here’s how it works, and I actually think this is kinda fun. So think of it like a personal challenge. For the next four weeks, pay for things with your credit card, debit card, or something that produces an online record of your spending as much as possible. Note: I’m not suggesting buying more stuff than you usually would, just that you use a card when you pay so you can review your purchases later. If you need to take cash out of an ATM, try to make a mental note of what you spent it on. And each time you swipe your card to pay for something, just ask yourself, “Does this thing I just bought bring me happiness and add value to my life?” Don’t think about it too hard, and don’t judge yourself for your response. Just take a moment to be mindful about your spending.

Then, on each of the next four Sundays, open up your credit and checking accounts online. Now open up a new spreadsheet, and name the first sheet “Expenses”. On this one, list each expense that has appeared in the last week, with a column for the date, the name of the expense (eg. Trader Joe’s, Amazon, Netflix), the cost, and a category (rent, groceries, eating out, etc.). You don’t need to come up with a ton of different categories; just try to identify the major themes.

(Why Sunday? Because 1) it’s the day of rest / resetting for the week / self-care, 2) reviewing expenses within the last seven days helps recall their context more easily, and 3) thinking about finances intentionally each weekend subtly puts me in a mindset to spend more mindfully the next week.)

Now, once you’ve accounted for the past week’s expenses, start a new sheet, and name it “Budget”. I name each line item in the first column, then have additional columns called Yearly, Monthly, Per Paycheck (I get paid twice a month), Weekly, and Daily. We’ll populate this one in sections, and I like to create a row for the name and total for each section.

The first one is for “Income”. In this section, add a row for each source of income you receive. This is usually for your salary-earning job. Enter your annual gross salary (ie. what you get paid before taxes are withheld) in the Yearly column, and then calculate the rest of the columns using these simple formulas:

Note that you can start with any column and calculate the others. For instance, if it’s easier for you to think about your salary on a bi-weekly basis, enter that in Per Paycheck first, then Yearly = Per Paycheck * 26, and then use the other formulas above.

Next section up is “Pre-tax Deductions”. This is going to contain your 401k (if your employer offers one) or any other deductions that don’t get taxed when you’re paid. Enter / calculate the amount of your contribution for each column. You might need to log onto your employer’s investment provider (such as Fidelity) to check the amount.

(As a reminder, we’re in phase 1 of gaining financial awareness, but looking ahead, phase 4 (Retirement Planning Pt 1) is going to be about increasing your 401k contribution to a point where it earns your employer’s full matching contribution if you haven’t done so already. As I said in the introduction, I am not your financial advisor, so take this with a grain of salt, but this is essentially a free boost to your income that you want to unlock as early as possible. Ask your manager or someone in HR to help you calculate how much you need to contribute in order to earn this bonus. Then later in phase 6 (Retirement Planning Pt 2), we’ll increase your 401k contribution to its limit. Again, I am not a financial advisor, but my 401k is one of the best ways I know of to force myself to generate wealth that I (mostly) can’t touch, so maxing it out and watching it grow is like a free mental health supplement.

Next are “Taxes”. This one will probably require you to pull up your latest paystub. Mine provides me with a few different types of tax, including federal, social security, medicare, and paid family leave. I add rows for each of them and fill in the values.

The next section will be called “Net Pay” and will just be a calculated value: Net Pay = Income - Pre-tax Deductions - Taxes. Calculate this across each column.

Next up are “Investments”. You’ll populate this section with investment accounts you’re funding like stock (may not apply when you’re just starting out) and / or debt accounts you’re paying off like student loans (may apply more earlier on). I also list recurring charitable giving accounts here as an investment in the world. List each account and enter / calculate how much you’re funding them.

(Again, we’re just in phase 1, but phase 5 (The Age of Asset Growth) is going to be about reaching a point where this section goes from being filled with debt accounts gradually being paid off to being filled with assets that make you money while you sleep. Focusing on this section becomes the focus of phase 7 and accelerates you toward later stages of financial independence.)

Ok, call the next section “Expenses”. You’re going to add a row for each category of things you spend money on. For some structure, try accounting for the “fixed expenses” that are paid on a recurring basis first. Some examples that may apply to you include rent, groceries, transportation, utilities, phone, internet, insurance, and subscriptions like Netflix.

The “variable expenses” can be trickier to account for, but try to estimate them as best as you can. Some of my rows here include eating out, shopping, entertainment, and hobbies. Where do those categories and amounts come from? Your Expenses sheet! This is where your one-offs should be reflected, but try to estimate how much you spend on them on some time basis (eg. monthly) and then calculate the other values. Especially early on, focus on being honest with yourself rather than aspirational. Also, note that the first time you try this, you’re probably going to be way off from what you’re actually spending because you’ve only been tracking your expenses for a week. You don’t have very accurate data to reference yet. Don’t try to get it all right at first, and give yourself a break if the numbers are higher than where you want to see them. You’ll revisit this section over the next few weeks as you learn more about your spending habits.

Honestly, these might be the most challenging, least straightforward, and emotionally charged rows to complete. This is where I see a lot of people give up out of frustration and guilt. Remember, don’t shame yourself or set unreasonable limits on what you spend. Instead, just focus on realistic accounting for how you spend money during the week.

Finally, the last section is called Balance. This is what you have left over (hopefully) after paying your fixed expenses. Similar to Net Pay, this section is just a calculated value: Non-fixed Expenses = Net Pay - Investments - Fixed Expenses. Calculate this across each column.

And just like that, you have yourself a budget.

The goal of phase 1 is only to complete this expense tracking and budgeting exercise over the next four weeks. Each Sunday, you’ll revisit your budget, adjust fixed expense amounts as you collect more expense tracking data, and maybe even start asking yourself such questions as, “If I tried cooking a few more times this week instead of getting takeout, could I decrease my non-fixed expenses and keep that money for something else?”

And questions like that are why we budget. The numbers themselves actually aren’t nearly as important as the questions they cause us to ask ourselves about our behavior and the creative opportunities they uncover to make minor day-to-day adjustments that can cause better financial outcomes in our lives. Phase 2 will be about a combination of increasing income and decreasing expenses to reach balance, and the expense side of the question will involve a lot of creative thinking about your budget to help your dollars go as far as possible.

But if you’ve made it this far after four weeks, congrats! You just gained the first superpower of money: financial awareness.

Next up is Phase 2: Financial Stability.